In Withdrawal

Jiab Wasserman

RETIREMENT ISN’T JUST about reaching some magic savings number. You also need a strategy for turning that pile of savings into a reliable stream of retirement income that’ll last for the rest of your life.

In academic lingo, it’s about changing from accumulation to decumulation—and it’s a topic that my husband Jim and I grapple with, as we figure out how best to cover our retirement expenses. There are three common strategies:

Systematic withdrawals. This is the best-known strategy. The goal is to generate a steady, inflation-adjusted flow of income from a volatile investment portfolio. It’s where the famous 4% withdrawal rate comes from.

The notion is that, over a 30-year retirement, the most you can safely spend each year from a balanced portfolio of stocks and bonds is roughly 4% of your nest egg’s starting value. That 4% is the sum withdrawn in the first year of retirement, with the dollar amount withdrawn in subsequent years increasing with inflation. If you use the 4% rule, U.S. market history suggests you shouldn’t run out of money, even if we get high inflation and terrible market returns.

Time-based buckets. This approach sets up separate pools of investments for different time periods in retirement. You might invest conservatively with high-quality bonds and cash investments in the near-term time bucket, take on moderate risk by investing in bonds and some stocks for the next bucket, and perhaps be even more aggressive by investing exclusively in stocks with the long-term bucket.

For example, upon retirement at age 65, a couple might divide their retirement portfolio into three buckets, one for ages 65 to 74, one for 75 to 84, and the third for 85 and beyond.

Income floor. With this strategy, expenses are classified as essential or discretionary. Income from bonds, cash investments, Social Security, pensions and income annuities are used to create a flow of reliable income to cover all essential expenses. Meanwhile, discretionary expenses are funded by a mix of stocks and other riskier investments.

Which approach is best? All three strategies have benefits and drawbacks.

Because systematic withdrawals involve drawing on a mix of stocks and bonds, it gives retirees the opportunity to increase their wealth if markets perform well, but it also carries sequence-of-return risk—the risk of poor market returns early in retirement, which can cause retirees to deplete their portfolio quickly.

The bucket approach appeals to our fondness for so-called mental accounting. Retirees may find they’re comfortable investing the long-term bucket aggressively, because they know they have the other two buckets to cover nearer-term expenses. The biggest drawback: It’s a complicated strategy to execute. When do you refill the near-term buckets? If retirees let the short-term bucket get too depleted, the overall portfolio’s allocation to stocks will increase, creating a riskier portfolio as retirees get older.

Meanwhile, the income floor appeals to retirees who want greater security. The downside: To buy that security, you’ll likely need a large investment in bonds and income annuities—and that means giving up the opportunity to increase wealth if markets perform well.

I personally like the income floor strategy. I would sleep better at night knowing that, no matter what happens in the financial markets, Jim and I will still have a roof over our heads and food on the table. But because we retired in our 50s, it’s expensive to buy annuities. We’re relatively young, plus interest rates are low. So, for now, our decumulation strategy is based on time-based buckets.

But our eventual goal is to create an income floor. At age 70, we’ll both claim Social Security, which will help cover much of our essential expenses. If we need more regular money every month to cover those expenses, we’ll then look to buy income annuities.

In 2017, Jiab Wasserman left her job as a financial analyst at a large bank and is now semi-retired. Her previous articles include Time Well SpentThose Millennials and Cutting Corners. Jiab and her husband Jim, who also writes for HumbleDollar, currently live in Granada, Spain. They blog about downshifting, personal finance and other aspects of retirement—as well as about their experience relocating to another country—at

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Perrin Rand
Perrin Rand
3 years ago

I retired 2 years ago and was faced with the prospect of turning savings into a paycheck. After reviewing a lot of different strategies I’ve devised a strategy that looks similar to the 3 bucket strategy but is different in philosophy and management. The buckets are strictly defined by asset class and function.

Cash is the spending bucket. It’s size is chosen simply to provide a convenient source to pay monthly bills and cover non-monthly bills like property taxes or car insurance. It is essentially what a person might have kept in checking prior to retirement. I tend to keep 3 or 4 months of spending in this account.

Bonds make up the reservoir bucket. CD’s could be part of this if desired. The goal of the reservoir is to accumulate all income streams and store it without losing value. Operationally there will be a small amount of cash to reduce buying and selling transactions. My preference is a diversified bond fund like the Vanguard total bond market fund. It holds value well and earns enough to offset inflation. This bucket acts as a reservoir, or buffer, to smooth out income from all sources. I like to keep 5 years (60 months) of expenses here.

Equities and other volatile, long term investments make up the growth bucket. This is the engine that fuels investment income. All the money not used for spending and reservoir is in the growth bucket.

The reservoir collects all income streams including social security, pensions, and investment income. Once a month a percentage of the reservoir is moved to spending. This creates a monthly paycheck. If you chose to keep 3 years of income in the reservoir you would move 1/36th of the reservoir every month. A 5 year reservoir would be 1/60th of the reservoir. The initial size of the reservoir would be chosen based on the expected monthly income from all sources times the number of months chosen. After that the size of the reservoir will gradually increase or decrease based on fluctuations in the income streams that replenish it.

The growth bucket is the primary source of investment income. All direct income from this bucket, like dividends, go straight to the reservoir. Investment growth is harvested and added to the reservoir each month. Harvesting is based on maintaining a base dollar amount and using that amount to determine how much growth to harvest. This base amount should be adjusted every year to match inflation. At it’s simplest you could simply harvest the amount that exceeded the base, essentially chopping off the growth when it happens. Because this would be quite variable and eliminate the benefit of momentum, a better approach is to take a percentage of the growth – that amount above the base. I like to think of this as a growth pool.

Calculate the growth pool by subtracting the base amount from the current value of the growth bucket. If the pool is a negative value then no growth can be harvested. To harvest the growth divide the growth pool by the number of months you want in the pool and sell investments to generate the income. The goal is to harvest more when the markets are up and less when the markets are down. A larger growth pool is less sensitive to market fluctuation while a smaller growth pool increases or decreases the harvested amount more quickly. I use a pool size of 60 months but that is just an arbitrary choice that worked well while I was modeling the behavior of this strategy.

The strength of this approach is that the amount extracted from the process is not based on assumptions of market growth or bond interest rates. Once set up the value of the reservoir and growth buckets respond to actual market conditions. The transitions are smooth allowing the monthly paycheck to vary slowly as the reservoir receives and dispenses income.

Because there is a reservoir of money that is affected only marginally by market volatility it’s much easier to ride out a market downturn. Also, the equities aren’t some future source of income that require thought and timing to use well. They are constantly growing or shrinking and the growth harvested is also growing and shrinking. Harvesting growth is a simple process that requires little judgment. The base amount, adjusted for inflation, allows investments to provide an inflation adjusted income stream that will never run out although there may be lean years followed by years of plenty.

I spend about 30 minutes a month putting account balances into a spreadsheet and moving money. It’s pretty easy and works well for me. It would work well with an income floor since those guaranteed income sources would simply flow into the reservoir.

R Quinn
R Quinn
3 years ago

How do you factor in the RMDs? Bank any excess into other accounts?

3 years ago

Buy deferred income annuities to fill that final bucket?

Jonathan Clements
Jonathan Clements
3 years ago
Reply to  Bob

Definitely something to consider.

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